Confero Summer 2013: Issue 3 - Page 17

Inclusion of Mutual Funds, Short-Term Investment Fund and Unitized Stock Fund The Ninth Circuit also rejected the plaintiffs’ claims that the defendants violated their duty of prudence by including mutual funds, a short-term investment fund (similar to a money market fund) rather than a stable value fund, and a unitized fund for participants’ investment in Edison stock in the Plan’s investment menu. The Ninth Circuit joined the Seventh Circuit in refusing to accept a bright line rule that fiduciaries should only offer wholesale or institutional shares, instead of retail-class mutual funds, because there are several factors a fiduciary must consider in selecting a fund. Such factors included whether the lower cost alternative may have lower returns, higher financial risk, or offer fewer services. The court also found that the expense ratio range for the Plan’s approximate forty mutual funds of 0.03 to 2% was not out of the ordinary. However, the court stated that its decision assumed that the cost of revenue sharing did not drive up the selected fund’s overall expense ratio and that the defendants were not motivated to select the mutual funds because of the financial benefit of revenue sharing. As for the short-term investment fund, the court held that the defendants were prudent because there was uncontroverted evidence, such as discussions on the pros and cons of a stable-value fund, showing that they had investigated the merits of this investment. Additionally, the inclusion of the unitized stock fund was not imprudent because the evidence showed that the defendants were vigilant in adjusting this fund when market conditions changed. Lessons for Plan Fiduciaries to Take Away from the Ninth Circuit’s Decision The Tibble appellate decision contains an abundance of points for ERISA plan fiduciaries to consider. The following are lessons that we believe plan fiduciaries should take away from this decision: • • Before including any mutual fund investments in a plan, plan fiduciaries should ask about any alternative class shares and make reasoned determinations on what class share would be in the plan participants’ best interests. If the fiduciaries determine that there are no salient differences between the retail and institutional class shares, they should inquire whether the plan meets the minimum investment requirement for institutional shares. If the plan does not meet this requirement, the fiduciaries should request that this requirement be waived. Plan fiduciaries should not automatically exclude retail-class mutual funds from their plans’ investment options. Selection of retail-class mutual funds is not automatically deemed an imprudent decision in the Ninth and Seventh Circuits, but plan fiduciaries should inquire about the availability of alternative class shares and make reasoned determinations as to which share classes should be included. • • • Plan fiduciaries should monitor their service providers, including investment consultants, to ensure that they are analyzing all aspects of the current and recommended investment options. Plan fiduciaries should document the reasons for all decisions related to investments, especially if they decide to choose a more costly class share. Note that the Ninth Circuit stated that expense ratios for mutual funds ranging from 0.03 to 2% were considered ordinary. Plan fiduciaries should review the mutual funds in their plans and determine whether to include or remove certain funds. This review should include determining which mutual funds have revenue sharing, the amount of the revenue sharing, and the costs associated with these funds. • Plan documents should contain language granting the plan administrator, and perhaps other fiduciaries, full discretion to construe and interpret the terms of the plan. This is especially important for plans in the Third, Sixth, and Ninth Circuits, because courts in these appellate circuits have applied a deferential standard of review to fiduciary duty claims as well as to benefit claims. • Plan fiduciaries in the Sixth or Ninth Circuits should be aware that section 404(c) may not protect them from liability if a participant brings a claim alleging imprudent selection of investment funds. If you have any questions on the Tibble decision or on fiduciary issues under ERISA, please contact Brad Huss or Angel L. Garrett at Trucker Huss. | 15